QR ENERGY VALUE PLAY

or VALUE TRAP?

VALUEx Vail 2014
June 18-20
Thomas A. Tomas Stone
Newstone Investments, L.L.C.
June 20, 2014 All rights reserved
WHY QRE?


Upstream MLP with 11% current distribution yield that is tax advantaged
Oil weighted production profile: 59% of production but 82% of revenue
Strong sponsor in Quantum Energy (36.4% owner); CoB Don Wolf has
history of value creation
Buyout of GP (and its incentive payments) eliminates non-pro rata returns,
lowers cost of capital
Production hedged: >90% in 14, >75% in 15, >70% in 16, 50% in 17: Cash
Flow well protected
Assets exclusively very mature fields with low and predictable production
declines (8-10% baseline)
Company has grown reserves at >10% CAGR and production at >7% CAGR
since IPO, overcoming natural decline
Horizontal drilling, downspacing & waterflood opportunities offer reserve
and production upside
Recent incremental $80 million increase in 2014 CAPEX will lead to
increased production/FCF in 2015
Distribution has increased from $1.65/year at 2010 IPO to current $1.95, 6%
CAGR
Distribution coverage ratio is 1.0x; increase in CAPEX likely leads to stronger
coverage and increased distribution
WHY NOT?


Distribution Coverage ratio is only 1.0x
Upstream MLPs are non-traditional and inherently more risky than traditional toll
booth MLPs, natural production decline means dilution & acquisition risk
Until April 2014 buyout of GP incentive payments, sponsor overpaid: caveat emptor!
Dilution coming: general partner buyout will cost 11.6 MM partnership units over next
4 years
Potential Overhang: Sponsor and affiliates own almost 37% of QRE
Recent incremental $80 million increase in 2014 CAPEX will not lead to increased FCF
until 2015
Distribution has not increased for 8 quarters, Discretionary Cash Flow did not grow in
2013 and convertible preferred distribution steps up in 2015
Oil and natural gas production mostly hedged for next three years: will not fully
participate in any near-term commodity price upside
Commodity risk in out years: If oil, natural gas liquids and or natural gas prices fall, so
will Cash Flow
Distribution Coverage and Maintenance Capital are malleable and potentially
controversial concepts
Mr. Market has spoken: QRE has 11% distribution yield and punished $80 MM increase
in CAPEX